Indonesia ushers in Beneficial Ownership Reporting Regime

Indonesia’s new beneficial ownership rules require “corporations” to determine and disclose information on their “Beneficial Owners” (defined below) in prescribed circumstances. Presidential Regulation of the Republic of Indonesia No. 13 of 2018 regarding the Implementation of the Principle on Recognizing Beneficial Ownership of Corporations in the Framework for the Prevention and Eradication of Money Laundering and Criminal Acts of Terrorism Financing (the “Regulation”), in force since 5 March 2018, has a one-year transitional period. The Regulation is a bid to increase business transparency and address ongoing issues of terrorism financing, money laundering and tax evasion in Southeast Asia’s largest economy.

What entities are subject to the Regulation?

The Regulation defines a “corporation” as any organised group of people or assets, whether or not established as a legal entity, including:

• Limited liability companies;
• Foundations;
• Associations;
• Cooperatives;
• Limited or firma (unlimited) partnerships; or
• Other forms of corporation (not defined).

Who is a Beneficial Owner?

In order to be defined as a Beneficial Owner, the individual must:

• Own at least 25% of the corporation’s shares;
• Hold over 25% of the voting rights in the corporation;
• Be entitled to more than 25% of the corporation’s annual profits; or
• Exercise power to appoint and remove directors, commissioners, managers or supervisors.

Additional criteria is provided in the Regulation specific to the type of corporation in the event that the criteria above are not met. For a limited liability company, a Beneficial Owner is an individual who:

• Controls the corporation;
• Receives (in)direct benefits from the corporation; and/or
• Is the true owner of the corporation’s assets or shares.

What are the reporting obligations?

A corporation must determine and disclose at least one Beneficial Owner meeting the relevant criteria to an authorised government body at the time of business registration, ratification, approval, notification, licensing, and/or the conduct of its business (where any Beneficial Ownership changes are to be submitted). The Beneficial Ownership information must be updated yearly and within 3 days of any change to the Beneficial Ownership structure of the corporation.

‘Know Your Beneficial Owner’

The Regulation further provides that each corporation must apply the ‘Know Your Beneficial Owner’ principle by designating an employee to identify and collate information on beneficial ownership, including being responsible for attending to information requests received from the relevant authority/ies (“designated employee”).

Commentary

Greater clarity is needed in a number of areas.

(a) Consequences of infringement

The Regulation is silent on the consequences for non-compliance.

Due to the nature of the obligations, commentators have noted the possible applicability of the Prevention and Eradication of Money Laundering Law (Law 8 of 2010) and the Prevention and Eradication of Terrorism Financing Law (Law 9 of 2013) (the “Existing Laws”). Under the Existing Laws, sanctions for a breach of reporting obligations may take the form of a warning, written reprimand, public announcement on any measures imposed, and/or an administrative penalty. Financial services providers intentionally violating reporting obligations (on suspicious financial transactions) face, upon conviction, a penalty of up to one billion Rupiah.

Given the widespread applicability of the Regulation across all corporations in Indonesia, subsequent tailored sanction provisions are expected.

(b) Its interaction with existing reporting mechanisms

It remains unclear how the provisions should be applied where the corporation is already under an existing reporting regime (for example ultimate beneficial ownership must already be reported in connection with a substantial shareholding in companies listed on the Indonesian Stock Exchange). It is hoped that corporations will not need to comply with multiple regimes, which would create an additional administrative burden.

(c) Scope

The additional ‘corporation type’ criteria appears to widen the ambit of the Regulation beyond that of comparable regimes in other jurisdictions and, in particular, it is unclear what would fall within the scope of “(in)direct benefits” and “true asset ownership”. The implementing regulations will hopefully provide clarity on the criteria and the scope of an “individual” as a Beneficial Owner.

Impact on the general non-recognition of beneficial ownership

Indonesian law does not distinguish between legal and beneficial ownership and the Investment Law prohibits ownership of shares through (beneficial) nominee arrangements. The effect of the Regulation is potentially more intrusive, in that whilst the intention is to understand the existence of a corporation’s ultimate individual controlling owner(s), it could, depending on the nature of subsequent implementing rules, operate to expose securitised funding arrangements where contractual controls such as voting rights, restrictive covenants and relinquishment of signing authority have been yielded to an individual who sits outside the direct organisational chain of control.

Another recent regulation issued by the Capital Investment Coordinating Board (BKPM) requiring investors to make a notarized statement confirming that its share ownership is neither on behalf of nor for the benefit of another party also indicates, when read with the Regulation, that the Indonesian authorities are now arming themselves with more tools to uncover and eliminate nominee arrangement structures.

Impact on corporations and next steps

The appointment of a designated employee is one of the immediate steps corporations have to take before the Regulation starts to apply. It is important for these designated employees to be sufficiently trained to understand their responsibilities. While this is expected to increase compliance costs, the year-long transitional period provides corporations with some breathing space to familiarize themselves with their obligations and for there to be further socialisation of what the government authorities are expecting corporations to disclose and the process for doing so. It is recommended that corporations take this opportunity to perform a “health check” on their corporate shareholding records and internal processes relating to collection, retention and reporting of the relevant data.

The Indonesian Government announced on 28 March 2018 that it is now preparing the implementing regulations for the Regulation which are expected to be issued within a year. The implementing regulations will act as guidance on how to comply with the Regulation and should answer some of the uncertainties posed by the legislation as it currently stands.

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